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Would You Use the Strategic Petroleum Reserve?

Mar 10, 2011 • 142 Views

I am not sure what a giant salt cave is and cannot quite imagine 727 million barrels of oil. But, put them together and you have our Strategic Petroleum Reserve

Concerned with supply disruptions after an OPEC embargo during the 1970s, Congress established the Reserve at 4 sites in Texas and Louisiana. In 2005, a new Energy Policy Act directed the Department of Energy to fill the reserve to one billion barrels. Since existing salt caves have no more room, the Department of Energy is currently getting authorization for new locations.

So far, we have twice used the Reserve for emergencies: during Operation Desert Storm in 1991 (disruption worries from abroad) and after Hurricane Katrina in 2005 (oil production facility damage in the Gulf). Other reasons for its depletion include a Clinton administration decision to keep heating oil prices down by releasing some of the oil. Described as a “swap,” private industry later had to return the oil it received.

This takes me to 2 questions:

1. If we decide to turn on the SPR spigots now, will lower prices result in more driving, more demand, and higher prices?

2. Contemplating the current oil market, how can we achieve the billion barrel directive?

The Economic Lesson

Sometimes good ideas have unintended consequences. Better unemployment insurance can lead to more unemployment. Seat belts can encourage unsafe driving. Diet snacks could make us fatter.

During the 19th century, William Stanley Jevons (1835-1882) observed that greater fuel efficiency could lead to more resource consumption rather than less. As he expressed it, “It is wholly a confusion to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is truth.”

Why? Lower prices could be one reason. The phenomenon has been called the Jevons Paradox.

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